Tuesday, June 27, 2017

Higher Local Minimum Wages: Updating Results from Seattle

The city of Seattle raised its minimum wage to $11/hour for many employers April 1, 2015, and then to $13/hour minimum wage in January 2016, with ongoing rises up to $18/hour in years to come. The Seattle Minimum Wage Study Team, based at the University of Washington, is making an ongoing effort to study the effects of this rise in the minimum wage as it happens.

 Last August I noted their study of the effects of the first nine months of the minimum wage in 2015 ("Higher Local Minimum Wages: Early Results from Seattle," August 8, 2016). Now the group has published on its website a follow-up study that includes data for the first nine months of 2016--that is, it includes the period just after Seattle's minimum wage rose from $11/hour to $13/hour. The most recent study is "Minimum Wage Increases, Wages, and Low-Income Employment: Evidence from Seattle," by Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor, and Hilary Wething (June 2017; it's also available as NBER Working Paper #23532).Here's their central finding: 
"Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs. These estimates are robust to cutoffs other than $19. A 3.1% increase in wages in jobs that paid less than $19 coupled with a 9.4% loss in hours yields a labor demand elasticity of roughly -3.0, and this large elasticity estimate is robust to other cutoffs. ...
Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016."
The finding is getting a fair amount of attention, because the researchers have some especially interesting data. A lot of minimum wage studies have data on total earnings--which is collected for Social Security and tax purposes--but not on hours worked. However, the state of Washington collects data both on hours and earnings. The authors note: 
"The analyses use data from the State of Washington Employment Security Department (ESD), collected quarterly from all employers in the state. Washington is one of only 4 states that collects hours worked, in addition to earnings, in these data. These unique data allow us to identify jobs that pay low wages and workers who earn low wages. Prior studies without hours data have had to define `low wage jobs' imperfectly (e.g. by focusing on the food service industry or teenage workers)."
The key difficulty in any minimum wage study lies in choosing a comparison group. For example, one approach might be just to compare Seattle before the minimum wage increase and after. But this "time series" approach has largely fallen out of favor, because so many different factors might be affecting Seattle's labor market at any given time, and it's hard to sort out the minimum wage effects from other factors. 

Thus, the study takes an alternative approach and selects several comparison groups. For example, one comparison is between Seattle and the rest King County that surrounds Seattle. Another comparison is to three other counties that surround King County, but do not actually border Seattle. Yet another comparison is carried out by doing a statistical comparison of how Seattle varied in the past compared to other counties across the state and building up to a "synthetic" comparison group by weights those other counties according to how much they have been coordinated with Seattle. All of these comparisons try to look at areas that have similar economic influences to Seattle, and thus would have similar ups and downs, except for the change in Seattle's minimum wage laws. None of these approaches is perfect by itself, of course. But looking at a group of potential comparisons, and thinking about the strengths and weaknesses of each comparison, gives a reasonable range of outcomes. 

Every economic study comes hedged about with warnings and issues, which the authors take care to enumerate. Here are a few of them: 

1) The estimate of how much a higher minimum wage reduced hours and jobs in this study is fairly high, compared to other minimum wage studies. Why might this be so? The authors point out that Seattle had already started from the nation’s highest state minimum wage at $11/hour, and then raised it substantially higher. Their previous study, looking only at the minimum wage increase to $11/hour in 2015, found much smaller effects. Thus, one way to interpret these findings is that moderate raises in the minimum wage up to about $11/hour have smaller effects on hours worked, but pushing substantially higher will have a noticeably negative effect. 

2) Obviously, this is a study of Seattle, where the unemployment rate is a rock-bottom 3.1%. The effects of a minimum wage are likely to be different in a place where the unemployment rate is substantially higher. 

3) An issue for a city-level minimum-wage law is that it's fairly easy for a number of employers to focus their hiring outside the city, thus avoiding the law. The study can look for signs of this effect: for example, if this kind of shifting is a big deal, it will probably be happening to a greater extent from Seattle to the areas of King County around the city, rather than shifting to the counties that are further away or to the "synthetic" comparison group.  But it's hard to analyze such shifts. In addition, a state-level or federal-level rise in the minimum wage law would not be as susceptible to such shifts. 

4) There are a number of other tricky issues like the fact that the state-level data doesn't cover earnings in the "informal" off-the-books sector of the economy. 

As other cities experiment with higher minimum wages, other studies will arrive. As I've said before, I'm happy to let the empirical patterns tell me what to believe. Based on this evidence, jacking up what is already a very high city-level minimum wage to even higher levels is bad for the total earnings of low-wage workers in that city. 

Monday, June 26, 2017

The Challenge of Electrifying Africa

\Electricity is the bloodstream of modern economies: powering lights, cooking, heating/cooling, motors, information technology,  and more. Conversely, the lack of electrification across countries of sub-Saharan Africa is an anchor holding back their economic future. Simone Tagliapietra lays out some of the issues in "Electrifying Africa: how to make Europe’s contribution count," written as a Bruegel Policy Contribution (Issue #17, June 2017). He writes: 
"Less than a third of the sub-Saharan population has access to electricity, and around 600,000 premature deaths are caused each year by household air pollution resulting from the use of polluting fuels for cooking and lighting. Solving the issue is a fundamental prerequisite for unleashing sub-Saharan Africa’s economic potential. Given the magnitude of the challenge, only a joint effort involving sub-Saharan African countries and international public and private parties would pave the way to a solution. ....
"Electrification rates in sub-Saharan African countries average 35 percent ... The situation is even starker in rural areas, where the average electrification rate in sub-Saharan Africa stands at 16 percent ... Furthermore, the number of people living without electricity in sub-Saharan Africa is rising, as ongoing electrification efforts are outpaced by rapid population growth. ... In sub-Saharan Africa, average electricity consumption per capita is 201 kilowatt-hours (kWh) per year, compared to 4,200 kWh in South Africa and 1,500 kWh in North African countries. The situation is even worse in rural areas of sub-Saharan Africa with access to electricity, where electricity consumption per capita remains even below 100 kWh per year."
For comparison, per capital electricity consumption in high-income countries around the world is about 9,000 kWh. Here's a heat map showing the share of population with access to electricity around the world.

Perhaps just as disturbing as the lack of electricity across many areas of Africa is that even the seemingly aggressive plans in place--essentially, to triple electricity capacity by 2030--would lead to less than half of what is needed to provide provide full access to Africa's population at that time (leaving aside the question of what quantity will be available on a per capita basis). Tagliapietra writes:  
"The jump in capacity [forecast for 2030] is projected to be based mainly on hydropower (35 percent of total  capacity in 2030) and gas (27 percent), plus oil (16 percent), coal (10 percent), solar photovoltaic (6 percent), geothermal (2 percent), biomass (2 percent) and wind (2 percent). Such a development lacks ambition, both quantitatively and qualitatively. From the quantitative perspective, reaching a level of total electrical capacity of 167 gigawatts (GW) by 2030 would not be sufficient to ensure access to electricity to all people in sub-Saharan Africa. The electrical capacity of sub-Saharan Africa would need to be expanded up to 400GW by 2030 in order to guarantee energy access to all."
Of course, there are arguments about how this expansion of electrical capacity should happen. There are on-grid methods like expanding hydropower, which does not emit greenhouse gases, but if done at large scale implies large dams that pose their own environmental and social challenges There are proposals for widespread use of off-grid or mini-grid sources, from renewables to diesel generators. I'm open to all kinds of proposals, as long as the plausible addition to electrical capacity is genuinely large--a multiple of existing levels.  

The current electricity utilities across Africa are not financially sustainable,and aren't up for this job. "Sub-Saharan African electricity utilities are currently simply not financially sustainable. The seminal study by Trimble et al (2016) showed that across sub-Saharan Africa only the utilities in the Seychelles and Uganda fully cover their operational and capital expenditures. All other sub-Saharan African utilities run in quasi-fiscal deficit (ie defined as the difference between the actual revenue collected and the revenue required to fully recover the operating costs of production and capital depreciation), and thus need to be subsidised by the state."

So the focus has been on outside sources of finance. The amounts involves are not earthshaking in a global context. "Enerdata (2017) estimates that from 2015 to 2030, sub-Saharan Africa will need around $500 billion in investment just to scale-up electricity generation. An equal amount of investment will be needed to scale-up electricity transmission and distribution lines. About $1 trillion by 2030 (or about $70 billion per year) will thus be needed to expand sub-Saharan Africa’s electricity sector in order to ensure universal access to electricity by 2030."

Where might that $70 billion per year come from? One source of funds could easily be a reallocatino within a number of countries in sub-Saharan Africa. At Tagliapietra points out, "Sub-Saharan African countries spend about US$ 25 billion each year in energy. This substantial amount of budgetary resource is mainly used to subsidise inefficient and wasteful electricity utilities and, in certain cases, to subsidise old forms of energy, such as kerosene. Redirecting these resources into productive energy investments would be a vital step in reshaping sub-Saharan Africa’s energy systems."

In recent years, about one-third of the addition to Africa's electrical capacity has come from Chinese-based firms.  The US government launched a  Power Africa initiative, working with a number of intenational agencies, back in 2013. Congress approved financial support for the program unanimously in February 2016, based on a combination of a worthy goal and the opportunities for US exporters to provide goods and services in support of African electrification. A chunk of Tagliapietra's article is about how Europe might create a parallel initiative.  Of course, a mass-scale expansion of electricity is an issue where financial resources are necessary, but not sufficient. Political leadership within nations of Africa will  need to play a central role, too. 

Those interested in issues relating to the countries of sub-Saharan African might also want to check out these relatively recent posts:


Saturday, June 24, 2017

Alan Blinder: Lamppost Theory and Dysfunctional Politics

Alan Blinder is working on a book with the working title The Lamppost Theory: Why Economic Policy So Often Comes Up Short. The title is based on an old metaphor that academic economists use to convey their relationship with politicians: “Politicians use economics in the same way that a drunk uses lampposts—for support rather than illumination.”

Blinder participated last week in a symposium on this topic at the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution (which can be watched online at the link), and one of his discussion slides offers the following thought experiment.
"Imagine that rewriting the tax code was assigned to a bunch of technocratic experts—with instructions from Congress—and then brought back to Congress for an up-or-down vote. ...
  • Chances that we’d get a vastly better tax code: about 100%
  • Chances that this will happen: about 0% 
  • Q: Does that make you think there’s something wrong?"
Of course, Blinder's point is could also be applied to other settings, like health care reform, or reform of public pensions, or allocation of spending within various departments. Indeed, the way in which our political system was able to close some military bases was to have a group of experts come up with a list of what bases would be closed, and then require the political process to confirm or oppose the entire list as a group, rather than picking the list to pieces and eventually doing little or nothing.

It can be hard for group with weak hierarchies to make decisions. Group members need to find a balance between making their own contributions in some areas but acquiescing to the group in others. To make this work, it takes a skilled political leadership with a combination of policy-related and hands-on managerial skills, together with group members who see themselves as acting in the context of a broader whole, not just as grandstanding individuals. The US political system seems lacking in these areas.

Friday, June 23, 2017

Tobacco Taxes in Low- and Middle-Income Countries

The appropriate taxation and regulation of tobacco use is well-trodden ground in US policy: after all, the breakthrough announcement by the US Surgeon General that "smoking is hazardous to your health" happened back in 1964 (for a commemoration of the 50th anniversary, see "Smoking, 50 Years Later," January 28, 2014).  But there's a renewed stir about tobacco policy in the last few years, driven this time by an international focus.

For example, back in June 2015 William Savedoff and Albert Alwang wrote "The Single Best Health Policy in theWorld: Tobacco Taxes" (Center for Global Development Policy Paper 062). They write: "Tobacco use is the largest cause of preventable disease and death in the world. ... A 10 percent increase in the real price of cigarettes leads to an average 4 percent reduction in tobacco consumption. ... Tobacco taxes are one of the most cost-effective health interventions available. Using taxes to raise the price of tobacco products in low- and middle income countries costs between US$3 – US$70 for each additional year of life (as measured by Disability Adjusted Life Years or DALYs) (Ranson 2002), comparable to the cost of child immunization."

Last November, the Fiscal Affairs Group at the IMF put out a report called "How to Design and EnforceTobacco Excises?" In April 2017, the World Bank held a two-day event titled "Tobacco Taxation: Win-Win for Public Health and Domestic Resources Mobilization Conference" (the agenda and slides for some of the presentations are here).

But for those who want a genuine doorstop of a report summarizing the state of knowledge on these issues, the useful starting point is the nearly 700-page report from the National Cancer Institute and the World Health Organization, "The Economics of Tobacco and Tobacco Control" (December 2016).
It includes an early chapter on "The Economic Costs of Tobacco Use, With a Focus on Low- and Middle-Income Countries," as well as discussions of supply and demand factors affecting tobacco use and the range of public policy options. Here, I'll just mention a few main themes that caught my eye, some of which may be useful for generating classroom discussion and lecture examples.

Pretty much every report on the economics of tobacco taxation, and this one is no exception, quotes
Adam Smith's thoughts on the subject (The Wealth of Nations, Book V, Chapter III): "Sugar, rum, and tobacco are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation. ... In the meantime the people might be relieved from some of the most burdensome taxes; from those which are imposed either upon the necessaries of life, or upon the materials of manufacture."

In calculating the effects of a tobacco tax, a key parameter is how the higher price will affect the quantity of tobacco demanded. The NCI/WHO report notes (footnotes omitted):
"Price elasticity of demand is the key economic concept used to understand or measure changes in cigarette consumption resulting from changes in the excise tax and in the retail price of cigarettes. In an economic context, elasticity refers to the responsiveness of one variable to a change in another variable. The price elasticity of demand measures how responsive demand (or consumption) is to a change in the price of the product. Technically, the price elasticity of demand is the percentage change in the consumption of a product in response to a 1% change in the price of the product, with all else remaining constant. As will be discussed below, nearly all empirical studies have found that the price elasticity of demand for tobacco products lies between zero and minus one. Estimates for high-income countries (HICs) are clustered around –0.4; estimates for low- and middle-income countries (LMICs) are more variable and somewhat greater in absolute terms (further from zero), with estimates clustered around –0.5. In other words, for HICs, a 10% increase in the price of tobacco is expected to decrease tobacco consumption by 4%. For LMICs, a 10% increase in price would be expected to decrease tobacco consumption by 5%. Thus, tax and price increases are a potentially potent tobacco control tool in all countries.
"Many econometric studies have estimated price elasticities for other aspects of tobacco use beyond consumption, including prevalence, cessation, initiation, duration of smoking, frequency of smoking (e.g., daily vs. non-daily), and conditional demand (amount of the product consumed conditional on being a user of that product). Still others have estimated cross-price elasticities of the demand for tobacco products—that is, the impact of a change in the price of one tobacco product (e.g., cigarettes) on the use of another tobacco product (e.g., smokeless tobacco), or of a change in the price of a subcategory of one product (e.g., premium cigarette brands) on the use of a different subcategory of that product (e.g., discount cigarette brands)."
Of course, the responsiveness of tobacco use to tax policy varies by group. For example, the immediate effect of a tobacco tax increase over the short-run of a year or two will be smaller (a common finding is about half as large) than the long-run effect over time. Smoking by younger people, not yet as well-established in the habit, tends to be more responsive to higher tobacco taxes than smoking by older people. And people in lower- and middle-income countries (LMICs) tend to respond more strongly to higher tobacco taxes than those in higher income countries. The NCI/WHO  report states:

"In summary, the number of studies based on aggregate measures of tobacco use in HICs is growing. These studies are becoming increasingly sophisticated over time, and the resulting estimates of price elasticity are remarkably consistent. Regarding the short-run price elasticities for cigarette demand, most estimates have clustered around –0.4, with the majority ranging from –0.2 to –0.6. Early studies of tobacco use in LMICs produced wide estimates of price elasticity, with most suggesting that cigarette demand in LMICs is much more responsive to price than cigarette demand in HICs. The rapid expansion of research in LMICs in recent years indicates that the range of price elasticity estimates has narrowed somewhat, with the majority of short-run price elasticity estimates falling between –0.2 and –0.8, with many clustering around –0.5. In all countries, studies that model the addictive nature of tobacco use conclude that the long-run price elasticity of demand is greater than that estimated for the short run. Price elasticity estimates tend to be more inelastic in countries where low-priced, relatively affordable cigarettes are widely available.

"Since the early 1990s, many studies based on U.S. cross-sectional data have confirmed Lewit and colleagues’ 1981 conclusion that youth smoking is more responsive to price than adult smoking. For example, using data from the 1992–1994 Monitoring the Future surveys, Chaloupka and Grossman estimated an overall price elasticity of –1.31 for youth smoking. In a later study with similar findings, Lewit and colleagues examined the impact of cigarette prices on youth smoking prevalence and intentions to smoke. Data for this study came from cross-sectional surveys of 9th-grade students in 1990 and 1992 from the 22 U.S. and Canadian sites in the Community Intervention Trial for Smoking Cessation. This study estimated that the price elasticity of youth smoking prevalence was –0.87, and the price elasticity of intentions to smoke by nonsmoking youth was –0.95. These results indicate that youth are somewhat more sensitive to price than adults."
One difficulty for economists in thinking about tobacco policy is that many of the effects of smoking are felt by the smoker. If people choose to smoke, with knowledge of the health consequences, then who are economists or public health experts to say they are wrong? Of course, the issue of second-hand smoke or the effects of pregnant women smoking are different here--those are external effects on others. But for many smokers, the issue is one that economists sometimes refer to as "internalities," where your own decisions have an undesired and unexpected on yourself. If smokers are hooked by a habit whose power and effects they do not fully anticipate, then one can make a case for policies that make tobacco use more costly, or quitting easier. The report notes:
"Smokers tend to hold erroneous beliefs about smoking and health: They think they will be able to quit when they want to, that low-tar cigarettes are less harmful than other cigarettes, that they are in a lower risk group compared with other smokers, or that the general health risks do not apply to them as individuals. In fact, many adult tobacco users struggle with quitting, the great majority of smokers regret having started, and young people taking up tobacco use significantly underestimate the addictive potential of these products and overestimate their likelihood of quitting in the future."
One reason for the ongoing focus on smoking in low- and middle-income countries is that tobacco taxes are already relatively high in many high-income countries. As a result, the potential gains to public health (and the potential for using tobacco taxes to raise government revenue) are greater in many low- and middle-income countries. Moreover, tobacco taxes in low- and middle-income countries as a group have barely budged in the last couple of decades. The report notes (footnotes and references to tables omitted):
"Total tax burden is defined as the sum of all taxes—including general sales taxes, such as a value-added tax—expressed as a percentage of the retail price. According to the 1999 World Bank publication Curbing the Epidemic: Governments and the Economics of Tobacco Control, the total tax burden on cigarettes is highest in HICs and decreases as a country’s income level decreases. Using 1996 data for the sample of countries in this study, the average tax burden was 67% in HICs, 50% in upper middle-income countries, 46% in lower middle-income countries, and 40% in low-income countries. A similar analysis based on 180 countries was performed by WHO in 2014 using the World Bank’s income categories. Although the choice of descriptive statistics (i.e., unweighted/simple average, weighted average, and median) substantially influences the results, the 2014 WHO data confirm the earlier World Bank findings that the tax burden is higher for HICs and lower for LMICs. In fact, considering unweighted average tax burdens, the picture in 2014 is not different from that in 1996."
The rhetoric around tobacco taxes can become overheated. For example, the preface of the NCI/WHO report states at one point: "Globally, approximately six million people a year die from diseases caused by tobacco use, including 600,000 from exposure to secondhand smoke. This is six million too many. Every single death from tobacco is a preventable tragedy." But the notion that public policy should seek to prevent "every single death from tobacco" is an extreme form of prohibitionism.

People act in many ways affect health: diet, exercise, driving cars, not taking a multivitamin ever day. In all of these areas, public policy can provide some information and incentives for healthier behavior, while still stopping far short of invasive micromanagement of people's day-to-day activities. In the US, federal cigarette taxes were raised dramatically in 2009, and many states have additional tobacco taxes of their own. But in many low- and middle-income countries, raising their  low tobacco taxes to higher levels offers a substantial gains to public health--along with a government revenue source that does not discourage working, hiring, or saving.

Thursday, June 22, 2017

The Story of Robert Keayne, Protocapitalist

Self-made entrepreneurs often generate a mixed public response. On one side, there is often an appreciation for their skills, the economic dynamism they provide, and in some cases for the charitable work funded by their earlier profits. For example, remember the ecomiums written when hard-boiled capitalist and hard-driving manager Steve Jobs died, or consider the current feelings about Bill Gates which are now filtered through the perception of work done by the Gates Foundation. On the other side, there is a deep-seated suspicion that "behind every great fortune is a great crime" (which seems to be an off-kilter paraphrase of a comment from a play by Balzac), and a belief that such a fortune must have resulted in substantial part from hard and exploitative dealing. 

This tension reaches far back into American history, well before the creation of the United States. John Paul Rollert tells the story of  protocapitalist Robert Keayne in "When making a profit was immoral,"  which appears in the Chicago Booth Review (Summer 2017). Rollert writes:

"Keayne was born in 1595 in Berkshire, England, not far from Windsor Castle. A humble butcher’s son, he would later note that he had received “no portion from my parents or friends to begin the world withal.” Accordingly, he obtained little in the way of formal education and was apprenticed at 10 years old to John Heyfield, a merchant-tailor in London. ...
"Keayne successfully completed his eight-year contract before striking out on his own. He proved adept at his trade, a blessing that was compounded by marrying well in his early 20s. By 1634, Keayne was prosperous enough to wager £100 on the Massachusetts Bay Company. It was an enormous sum, more than double the yearly income of the average wageworker in Victorian England 250 years later. The risk, however, was in keeping with Keayne’s conscience, which had been inflamed and enlightened by Puritan evangelists, while also being a considered bet by a savvy merchant on the bounty of a brave new world just across the ocean.
"Along with Anne, his wife, and beloved Ben, the only one of his four children to survive infancy, Keayne voyaged to Boston in 1635, swiftly becoming one of the city’s most distinguished and widely despised merchants. In fact, we only know so much about him because of the 50,000-word will that he began writing in 1653, three years before his death, to provide a full account of his life and the probity of his business affairs in order to “cleare myself in all material things.” ...

"In 1639, only four years after he had arrived in town, Keayne was accused of “oppression” in his dealings, a catch-all term that covered any instance of buyers or sellers taking advantage of the ignorance or necessity of one another in a business transaction. The specific charge was that he had sold sixpenny nails for 10 pence a pound, reaping a healthy profit off his neighbor. Too healthy, it seemed, for the customary profit margin on basic goods in the colony was between 10 and 30 percent.

"Keayne argued that the matter was a simple misunderstanding, willful on the part of his accuser. He said that the man had originally purchased sixpenny nails on credit for 8 pence a pound and later exchanged them for eightpenny nails at 10 pence a pound, a profit margin of only 20 percent (hardly a “haynous sine,” Keayne observed in his will). It was only when Keayne asked him to pay off his balance, after giving him ample time to do so, that the man brought his suit to the authorities, with the accusation of oppressive pricing.
"Early on during the trial, Keayne made a strong show of defending himself, with the messenger who delivered the second bag of nails testifying on his behalf, but then a raft of townspeople came forward to levy similar charges against him. As John Winthrop, the governor of the settlement and perhaps the most esteemed man in Boston, wrote in his diary, Keayne was widely known for being “notoriously above others observed and complained of” for the prices he charged and had been “admonished, both by private friends and also by some of the magistrates and elders”—all, it seemed, to no effect. He was convicted by the General Court of the offense, which had broadened beyond a single transaction to encompass a general way of doing business, and fined £200, a sum that was later reduced to £80.
"Had the matter rested there, one suspects that Keayne would still have complained in his will of the “deep and sharpe censure that was layd upon me,” but the incident would not have been the defining moment of his professional career and, perhaps, his life. But then the elders of the First Church of Boston took up the matter to determine whether an ecclesiastical reproach was also warranted.

"Keayne was fortunate to escape the most serious punishment, excommunication. That sentence was passed on eight offenses related to economic matters between 1630 and 1654, a period when only 40 such sentences were given, tantamount, as they were, to consigning one to eternal damnation. Instead, Keayne was formally admonished, according to the records of the First Church, “for selling his wares at excessive Rates, to the Dishonor of Gods name, the Offense of the Generall Cort, and the Publique scandal of the Cuntry,” a censure he lived under until the following May, when he became “Reconciled to the Church.”
"Keayne continued to attend services, and the day after the rebuke was handed down, the Reverend John Cotton, the city’s foremost theologian, delivered a sermon that was obviously inspired by the wayward merchant. The subject, Winthrop wrote in his diary, was the “false principles” of trade that so many merchants seemed to abide by. They were recorded by Winthrop as follows:
  • That a man might sell as dear as he can, and buy as cheap as he can.
  • If a man lose by casualty of sea, etc., in some of his commodities, he may raise the price of the rest.
  • That he may sell as he bought, though he paid too dear, etc., and though the commodity be fallen, etc.
  • That as a man may take advantage of his own skill or ability, so he may of another’s ignorance or necessity.
  • Where one gives time for payment, he is to take like recompense of one as of another.
Again, following these bullet points are considered “false principles,” and following such principles was considered grounds for censure or even excommunication. The guiding social/religious principle for merchants, as Rollert quotes in the words of the famous Puritan  John Bunyan (author of The Pilgrim's Progress) is that "A man in dealing should as really design his neighbour’s good, profit and advantage, as his own.” In the modern lingo, the parallel comment would be that there is a corporate social responsibility that all stakeholders should be taken into account.

The story of Robert Keayne's last will and testament seems to have been unearthed some decades ago by Bernard Bailyn, who described "The Apologia of Robert Keayne" in the William and Mary Quarterly (7:4, October 1950, pp. 568-587, available through JSTOR). Keayne's actual will from 1653 was reprinted in 1886 in "A Report of the Record Commissioners of the City of Boston containing miscellaneous papers," which is available through the magic of HathiTrust. Bailyn writes: 
"When his executors came to open this Last Will and Testament they found not only a complicated allocation of his worldly goods but an outpouring of long suppressed indignation, a helter-skelter apologia pro vita sua and a reiterated demand that justice be done him even if only in memory. It had taken him five months to write out the document, and when the will was copied into the first volume of the probate records of Suffolk County it filled no less than 158 pages ...

The resulting 5I,000 words provide an insight into the workings of a seventeenth-century mind. What he had "here writt out of the greife and trouble of my heart" was an appeal to the Puritan conscience of New England to reconsider its "un- christian, uncharitable and unjust reproaches and slandrs" against him, and raised the hope "that such which have taken liberties to load me with divers reproaches and long to lay me under a darke cloude may have cause to see that they have done amisse and now to be sorry for it though they have not beene so before."
Of course, we don't know the ins and outs of the dispute over the price of nails (which were a highly valuable commodity at the time). We do know that Keayne rose from being an impoverished apprentice to being one of the wealthiest men in the Boston of his time. We know that he had enemies, and that some of the accusations made against him were false, and that he a high-profile court case was decided against him. We also know that he gave considerable money to the poor and to the city throughout his life, and even left a bequest to Harvard. We also  know that he was often chosen for responsible positions. Baily writes:
"Until his death in 1656, however, despite unpopularity and repeated controversies with his fellow citizens, Robert Keayne continued to fill responsible public positions. He held his earliest public office in 1636, when the Boston Town Meeting elected him to a committee charged with the ordering of all land allotments and other business except elections. In the years that followed he was reelected selectman four times, chosen as a representative to the General Court at least seven times and served in innumerable lesser functions such as surveyor of the highways."
From a modern view, almost 400 years later, Robert Keayne seems like a many of considerable practical talent, trying to combine a life of capitalist success and Puritan moral values--and sometimes getting caught in grinding of these two forces.

(For a discussion of price controls in the colonial United States at the time of the Revolutionary War, see "Price Controls in the Colonial United States: "A Sharping Set of Mushroom Pedlers" (December 27, 2016).

Tuesday, June 20, 2017

Unions in Decline: Some International Comparisons

Union membership and clout has been dropping in the US economy for decades. But it's not just a US phenomenon: a similar drop is happening in many high-income countries. The OECD Employment Outlook 2017 discussed the evidence in "Chapter 4: Collective Bargaining in a Changing World of Work."

Here are a couple of illustrative figures. Across the OECD countries, about 17% of workers belong to a union. As the report notes: "Trade union density has been declining steadily in most OECD and accession countries over the last three decades (Figure 4.2). Only Iceland, Belgium, and Spain have experienced a (very) small increase in trade union density since 1985 ..." In each of the panels, the solid black line is the overall OECD average, for ease of comparison.

Here's a parallel figure showing comparisons across countries for "collective bargaining coverage," which is the share of employees covered by collective bargaining agreements. On average, union bargaining coverage in OECD countries declined from 45% in 1985 to 33% by 2013.

The distinction between these figures should make the point that a number of countries have rules which in some cases require that firms pay non-union workers similarly to union workers. Conversely, many of the same countries also have a raft of possible exceptions to these rules. The OECD chapter provides a more detailed discussion of these ins and outs. But several overall patterns seem clear.

1) Labor union power is weaker just about everywhere.

2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels.  This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.

3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.

Friday, June 16, 2017

An Update on Foreign Direct Investment

Foreign direct investment is "an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. [T]he investor´s purpose is to gain an effective voice in the management of the enterprise. ... Some degree of equity ownership is almost always considered to be associated with an effective voice in the management of an enterprise; the BPM5  [Balance of Payments Manual: Fifth Edition] suggests a threshold of 10 per cent of equity ownership to qualify an investor as a foreign direct investor." 

That's the definition of foreign direct investment from UNCTAD, which has published the World Investment Report 2017: Investment and the Digital Economy. This year's report includes the usual detailed overview of trends, along with some discussion of the evolving policy climate for foreign direct investment and the changing role of digital companies. Notice that FDI is explicitly separated from "portfolio investment," in which international investors buy stocks or bond or other financial assets across financial borders but without any management involvement. The usual believe is that FDI plays an important role in direct facilitation of international trade, and in the diffusion of technology and management expertise across borders, while portfolio investment plays a much smaller role in these areas.

Here are some overall patterns. FDI peaked back in 2007, and the 2016 level of $1.8 trillion it had not yet surpassed that earlier level. Most FDI inflows are to developed economies, although developing economies are not far behind.

What are the major countries for FDI inflows and outflows? The US economy perhaps unsurprisingly tops both lists, but there are some eye-raisers as well. Here's the list for inflows of FDI. Three points catch my eye here. First, notice the huge drop-off in inflows to the UK in 2016, essentially matched by a large rise in inflows to Ireland. My suspicion is that this change is Brexit-related. Second, if one combines the inflows to China, Hong Kong, and Singapore--on the basis that they are all basically China-related--then inflows to the area of China are now essentially the same as those to the US economy. Third, a reason why the UK, Ireland, and Netherlands all rank so high, given that they are actually not large economies in the global context, probably involves ongoing relocations of corporate ownership across national borders: for example, perhaps a US company owns a substantial share of a firm in Netherlands, which in owns a substantial share of a firm based in a third country. 

Here's the corresponding figure for outflows of foreign direct investment. Again, the US and China lead the way. But overall, the high-income countries shown in green represent a greater share of FDI outflows than the emerging market countries shown in orange. 
We hear a lot about a globalizing world economy. So what explains why FDI has essentially been flat for a decade? 

At least some of the reasons seems to be that countries are becoming more skeptical about the potential merits of FDI, and are more likely to impose rules placing limits on foreign buyers if they fear that "strategic" assets might be held by foreign investors, that domestic workers might be laid off, and so on. UNCTAD does a count each year of changed in national investment policies, which are then broadly classified as tending to liberalize or to restrict FDI. Back in the 1990s, pretty much all the changes were on the "liberalization" side. But starting in the early 2000s, the share of such changes involving "restriction" started rising, and is now about one-quarter of the changes in any given year.  

On the other side, the rising prominence of digital multinational enterprises has tended to support the level of FDI, and keep it at least flat rather than declining. UNCTAD makes a list of the top multinational enterprises, which are ranked according to the size of their foreign assets: that is, not according to their international sales, or their international visibility, but according to their level of foreign direct investment over time. Because of this method of ranking, as the report notes, "some well-known global digital giants, such as Amazon and Facebook, do not feature in the top 100. Neither do major telecom players, such as Verizon and AT&T, whose domestic assets and revenues are very large, but whose foreign businesses are relatively small." 

Thus, here's a picture of the tech and telecom companies in the UNCTAD top 100 list of multinational enterprises, and how the list has evolved in recent years. 
 
As the report explains (citations and parenthetical references to boxes and figures deleted):
"The fast rise of tech MNEs [multinational enterprises] represents one of the most noteworthy trends in the world of global megacorporations in recent years. This phenomenon has attracted increasing attention, not only at the research and policy levels, but also in the broader public. In 2010, the relevance of tech companies in the top 100 MNE ranking compiled by UNCTAD was still limited and not significantly different than 10 years earlier. From 2010 to 2015, in contrast, the number of tech companies in the ranking more than doubled, from 4 to 10, and their share in total assets and operating revenues followed a similar, and even more pronounced, trend . This growing weight results from a group of tech MNEs, mainly from the United States, entering the ranking. Some of these companies, such as Alphabet (Google) and Microsoft, are leading the digital revolution; others, such as Oracle, heavily rely on and benefit from the acceleration of the internet to deliver their value proposition. When including telecom MNEs, other important enablers of the digital economy, 19 MNEs in the top 100 are ICT companies – a sizeable portion of megacorporations. Tech megacorporations are enjoying exceptional growth momentum."
The statistics on foreign direct investment can be hard to disentangle, because ownership of foreign assets is an interconnected and overlapping network that can cross national borders multiple times. But the sheer magnitude of these flows--$1.8 trillion in FDI in 2016--compels attention.